The Fundamentals of Economics PowerPoint PPT Presentation

Production Possibilities Frontiers and Opportunity Costs. Learning Objective 2.1. Production possibilities frontier (PPF) A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. . Production Possibilities Frontier. M

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The Fundamentals of Economics

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2. The Fundamentals of Economics Two facts constitute the Economizing Problem:
Society’s economic wants are unlimited & insatiable
Economic resources are limited or scarce
Scarcity The situation in which unlimited wants exceed the limited resources available to fulfill those wants.

3. Production Possibilities Frontiers and Opportunity Costs

4. Production Possibilities Frontier Model Assumptions:
Full Employment & Productive Efficiency
Recourses are Fixed but can be reallocated to different uses
Fixed Technology (Short Period of Time)
Economy is Producing ONLY Two (2) Goods
An economy achieving full employment & productive efficiency must sacrifice some of one good to obtain more of another good
Scarce resources prohibit economy from having more of both goods

5. Production Possibilities Frontiers and Opportunity Costs

6. Increasing Opportunity Cost Since resources are scarce, people must choose between alternatives
Opportunity Cost: The amount of other products that must be forgone to obtain 1 unit of a specific good
The opportunity cost of each additional unit of a good is greater than the opportunity cost of the preceding one
Opportunity cost is measured in real terms
The more of a product that is produced, the greater its opportunity cost
Increasing OC because economic resources are not completely adaptable to alternative uses